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Reviewed by Feb 01, 2023| Updated on
You must have often heard the term “per capita income” or read it in the newspaper in the economic section. Not only that, but almost all of us have learned about this term sometime in our growing years. But what does the term per capita income actually mean and why is it so important in the world of economics? Per capita income is often used in economic or business fields in order to measure by individuals in a population. Per capita income is expressed in the form of a ratio. This ratio is used to compare and conceptualise measurements per person. The ratio can also be used to provide different information depending upon where and how it is used. To understand the importance of per capita income in the economic and business world, we need to go through the basics of this term and see how it is calculated and used in different ways.
The term per capita is derived from a Latin phrase which means “by head”. The term is usually used to determine the average per person in a given measurement. The term is most commonly used in economics, statistics and business as a way of reporting average per person. By knowing the per capita, you get an idea about how the country, state or city affects the people living there.
Per capita ratio is often used to compare economic indicators of countries with different population sizes. The context in which per capita is used is what determines its interpretation and the unit that it measures. The two common economic indicators which make use of per capita are income and gross domestic product. When talking in legal terms, there is a specific definition for per capita. Given that definition, it means that an estate is divided equally among all beneficiaries.
Since here we are majorly talking about the per capita income, you should know that per capita income is the measure of the amount of money earned per person in a country or a geographic region. This per capita income is often used to evaluate how much income there is per person living in a particular area, which in turn tells you about the standard of living and quality of life in that particular area. When calculating the per capita income of a nation, the national income of the country is divided by its population.
Every person in the population including men, women, children and even newborn babies are counted by the per capita income as every one of them is a part of the region’s or nation’s population. This characteristic of per capita income sets it apart from other common measurements of the area’s prosperity. One such other measurement is household income that counts all individuals living in one household. Another measurement is family income which counts all members related by blood, birth, marriage, or adoption and are living under the same roof. Per capita income proves to be useful in assessing an area’s affordability. This comes in handy when used in conjunction with real estate prices to determine whether the homes in a particular area are out of reach of an average middle class family. Per capita income is also used by businesses to help select a region for starting new business. If the area’s per capita income is high, the business has a better chance of earning more in that region. Since the people in such areas won’t hesitate from spending money, the business or company has a higher chance of generating more revenues. This is not possible in areas with low per capita income.
Although per capita income is a reliable and widely used economic metric, it also comes with a few limitations. Some of these limitations are its instability to account for inflation, poverty, income disparity, savings or wealth. As per capita income considers the overall income of a population and divides it by the number of people without taking into account the inequality in income of people from different parts of the society and different work backgrounds, it cannot always be considered as an accurate representation of the standard of living or prosperity of a particular area or nation. This is why per capita income doesn’t really give you a true or clear picture about the living conditions of all people in a certain area.
Per capita income is the income of each person in a population of a particular area. Based on this explanation, per capita income can be calculated by using the following formula:
Per capita income = total income of the population / population
Let’s understand this with an easy example; for instance the total income of a small geographic area with a population of 50,000 people is 50 lakh, the per capita income of that region will be 50,00,000 / 50,000 which is 500 rupees.
When calculating the per capita income of a nation, you can simply divide the nation’s total income with the country’s population. Knowing the per capita income of a country gives you an idea about the quality of life of people living in that country and the prosperity of the nation.
The following are the most popular ways in which per capita is used: - Gross domestic product (GDP) - Per capita income
GDP per capita is a measurement utilised to determine a country's economic output the number of people living in the country. The GDP of your country is calculated by dividing the country's total domestic output by its population. The formula for GDP is as follows: Gross domestic product/population = GDP per capita
You can also discover the gross national income per capita of a country using a related formula to the one you used to get the GDP per capita. To determine the gross national income per capita, you can use the same information used to calculate the GDP, in addition to any income that residents from foreign investments.
Just like any other economic or financial tool, per capita income has its own limitations which are stated as follows: *It does not account for income inequality among the population and hence cannot be considered to be an accurate measure of the standard of living of people. *It does not reflect inflation, which is the rate at which the prices rise with time. This affects the purchasing power of the consumer and limits the increase in income. Due to this happening, per capita income can possibly overstate a population’s income. *An individual’s personal wealth and savings are not included in the per capita income. *Children are also included in the calculation of per capita income even though they don’t earn. This is why countries like India where the number of children is high may have skewed results of per capita income.